Tuesday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight Tuesday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

There's a simple reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, such as low-rated financials Bank of America (NYSE:BAC) and Wachovia. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 110,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: Since CAPS' inception in 2006, five-star stocks are beating the market by 12%.

Written in the (five) stars?
For example, out of the 68 CAPS All-Stars who've rated IRIS International, just three have a bearish opinion. Fueled by that steadily growing support, the small-cap in vitro diagnostics (IVD) company has kept a five-star rating for the past three months straight.

In March, CAPS All-Star KWT811 brought IRIS's falling stock to our community's attention:

Not sure why it has dropped so drastically, they expect record revenue. As they grow they'll sell more consumables with higher margins than their instruments. Could be swallowed up by a larger healthcare company in the IVD business like Roche or Abbott.

Completely consistent with that call, shares of IRIS surged yesterday after the company indeed posted record revenue and earnings driven in large part by higher margins in consumables -- just as KWT811 had predicted.

The bullish lesson?
Don't be afraid to go small. By focusing on attractive small caps that are doing big things underneath Wall Street's radar -- like posting record results and getting into higher-margin products -- you can consistently find stocks that are inefficiently priced. Once that progress translates into "visible" earnings growth, the company's following (and stock price) will probably get a nice boost, too.

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are Tuesday's biggest one-star decliners:   

One-star stocks inspire the least confidence from our CAPS members. So although yesterday's drop in five-star offshore drillers Hercules (NASDAQ:HERO) and Atwood Oceanics may have caught our community off-guard, one-star stocks are fully expected to fall hard. Since CAPS started, one-star stocks have dropped by an average of 11.4%.

Did CAPS call the fall?
Just last month, for instance, CAPS member HelicopterBen shared these bearish thoughts on Yellow Pages publisher RH Donnelley:

Years of offering poor quality Yellow Page products, while demanding top advertising prices, has caught up to them and many other publishers. Poor quality at the point of sale has led to years of disconnected [advertisers'] phone numbers etc., which has turned off consumers and increased the speed and number of consumers who are looking to internet and other services. ... [Idearc] and RH Donnelley mirror one another in quality and their respective stock prices. Stockholders, good luck.

Just as HelicopterBen had warned, shares of RH Donnelley plunged after rival Idearc posted second-quarter earnings well below Wall Street's expectations.

The bearish takeaway?
Before digging down on a specific company, try to have a good grasp of the entire industry landscape. That includes knowing the general outlook for the sector, and, as CAPS' HelicopterBen demonstrates, how each of the competitive forces have shaped the business in question. If you come to find out that the whole industry isn't that attractive, you might be better off just moving on entirely.  

The final Foolish move
Investors often focus strictly on stock-price movements without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, thousands of investors are Foolishly sharing insightful investment tips to help, above all else, identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor.

Log in to CAPS today, and start participating. It's absolutely free -- and a lot of fun!